How Did American Eagle Outfitters Perform In 2018?

American Eagle Outfitters (NYSE: AEO) reported somewhat mixed fourth quarter earnings recently. The retailer’s EPS of $0.43 surpassed the consensus estimate of $0.42 while revenue of $1.24 billion was below the consensus expectation of $1.27 billion. The retailer’s fourth quarter comparable sales rose 6%, marking 16 straight quarters of positive comp growth. The company’s annual revenue increased by 6% year-over-year to cross $4 billion, and its annual diluted EPS surged by almost 30% to reach $1.47 in 2018. Higher digital sales, continuous growth of Aerie brand and improved operating profit helped the company to grow its bottom line by more than 28%.

AEO’s gross margin improved in 2018 on account of improved markdown rate and rent leverage, which was partially offset by higher delivery costs due to increased transaction count and increased incentive expense. For Q1 2019, the company expects comparable sales to increase in the low single digits and EPS to be approximately $0.19 to $0.21, which is similar to the mean consensus estimate of $0.21. We currently have a price estimate of $27 per share for AEO, which is ahead of the current market price. We have summarized our full year expectations for AEO, based on the company’s guidance and our own estimates, on our interactive dashboard AEO’s 2018 Financial Performance. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Consumer Discretionary Services company data here.

Aerie Brand Continues To Outperform

American Eagle’s lingerie and activewear brand, Aerie, has been major growth vehicle for company, going from strength to strength in driving its overall profitability. The brand delivered another impressive comp increase at 23% in Q4 2018 – the brand’s 17th consecutive quarter of double-digit comp growth. The brand is expected to cross $1 billion in annual sales in the near term, as AEO continues to explore untapped capacity in new markets and grow its customer base. Aerie is also expected to achieve significant growth from both the digital channel and retail stores, as the company plans to increase its exclusive Aerie stores in fiscal 2019. Going forward, we expect the Aerie brand to post double-digit comparable sales growth in the foreseeable future and drive overall revenue growth for the company.

Digital Channel, Jeans Sales Reach Record Highs

Customer shopping patterns have been shifting from brick-and-mortar locations to digital channels, and customers are increasingly more likely to shop across multiple channels that work in tandem to meet their needs. AEO’s digital sales were strong in Q4 2018, posting a positive high single digit increase in the quarter, its highest-volume quarter ever. Digital penetration rose to 31% of revenue in the fourth quarter and 28% for the full year, crossing $1.1 billion in digital annual sales. The company’s stores sales also saw a fifth consecutive quarter of comparable sales growth in Q4 2018. However, we expect the growth in digital channel sales to outpace the retail store sales for the foreseeable future.

AEO surpassed $1 billion in jeans sales on an annual basis, gaining nearly 200 basis points of market share. Across age demographics, AEO became the number one women’s jeans brand and the number two overall, per management. The company’s jeans business has strengthened dramatically over the past few years, and we expect it to continue to thrive, as AEO remains focused on innovation and introducing new trend-setting products.

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